Venezuela’s Bond Market: Excessively Bullish?

• Maduro’s fall has put Venezuela’s debt crisis, one of the largest unresolved sovereign defaults globally, in the spotlight.

• The big question fixed income investors are asking is what is going to happen to Venezuela’s $150 billion pile of debt.

• In recent weeks, investors have controversially been further buying up defaulted Venezuelan bonds, betting on a future restructuring given the regime change from the US. However, this optimism is balanced by substantial risks with bilateral debt to China, legal complexities and heavy assumptions regarding oil growth.

• Hence, in this section of the Cordoba note we focus on the ramifications of Venezuela’s current situation on their debt markets, exploring the potential for an effective restructuring.

Venezuela’s History of Debt

• Venezuela’s debt burden of around $150 bn is a result of years of economic mismanagement, oil overreliance, and major ramifications from US sanctions preventing the country’s access to international capital markets.

The predominant forces elevating Venezuela’s sovereign debt were:

• Nationalisation of major sectors (2007-2012): Hugo Chávez’s presidency involved seizing foreign oil, mining and industrial assets, causing foreign firms to win billions of arbitration awards against Venezuela.

• US sanctions started in 2014 and expanded in 2017, including restrictions on Venezuelan debt trading. These cut Caracas off from global capital markets, freezing refinancing and restructuring options.

• Venezuela’s default in 2017: Venezuela defaulted on its sovereign and PDVSA bonds in 2017, ballooning accumulated interest and penalties (around $100bn in bond debt alone).

Scale of Debt

• Caracas long ago stopped publishing reliable figures but estimates suggest that debt is twice the size of the economy, outlining the severity of this solvency challenge.

• The debt is owed to multiple sources. $60bn alone comes from defaulted bonds held by private investors, while court judgements and suppliers are owed an even greater chunk.

• Crucially, a large bloc of bilateral debt is owed to China, who lent tens of billions to Chávez and Maduro via agreements collateralising oil for credit. This provides China leverage over Venezuelan oil export flows which further complicates restructuring discussions.

• Alongside this sits a large pool of legal and arbitration claims stemming from expropriations. These creditors are not passive and will seek recovery alongside bondholders, adding another layer of complexity.

• The result is a highly fragmented creditor situation. While bondholders hold the largest chunk, multilateral institutions and arbitration claimants add to this list. This foreshadows a highly difficult debt restructuring process.

The Bond Market

• Venezuelan bonds have traded at distressed levels for years since mid-2020. This was exacerbated by the 2017 default and US sanctions, where prices of many sovereign and PDVSA bonds plunged to pennies on the dollar. The market was effectively frozen with no debt service being paid and prices reflecting little anticipation of a future restructuring.

• However, late 2024 had political shifts with a disputed election and greater international pressure on Maduro, sparking renewed investor interest from hedge funds and distressed debt investors in defaulted Venezuelan debt. Sovereign bonds rose in the 20-30 cent range, delivering a 95% return in 2025 at index level (the world’s best performing bonds in 2025 with prices doubling over the year).

• The market was subsequently pricing a heavy eventual debt restructuring with a clear bullish trend.

• The extraction of Maduro in early January 2026 proved to be the catalyst investors were looking for with Venezuelan bonds soaring in the days after. Defaulted bonds issued by Venezuela and PDVSA rose by 20-30% on the dollar. Market confidence rose with many hedge funds longing Venezuelan bonds.

Prospects of a Debt Restructuring?

• Fixed income markets have turned immediately to the likelihood of Venezuela’s debt being restructured. Mirroring Greece’s 2012 debt restructuring, Venezuela is one of the largest sovereign defaults on record, and analysts have warned Venezuela will require a ‘multi-track, multi-year settlement framework’ (Citi, 2026).

• However, unlike Greece, Venezuela’s situation is arguably more structurally complex due to the range of creditor groups involved.

• On the positive side, the rally in Venezuelan bonds suggest markets are seeing a credible pathway. US officials have indicated engagement with the interim government led by Delcy Rodriguez. Moreover, JP Morgan stated that once an interim government is in place, licensing debt negotiations becomes a ‘logical next step’.

• Further evidence of this has come from a formation of the Venezuela Creditor Committee, comprising of major institutional investors such as GMO, Greylock Capital, T. Rowe Price and Fidelity. The group’s existence could indicate that private creditors are positioning for negotiations rather than litigation.

• Despite this, the coordination among bondholders does not guarantee progress. A lack of clarity remains around who now represents Venezuela at the negotiating table and how priorities will be balanced.

• Citi estimates there will be a 50% haircut on defaulted bonds, with creditors receiving long dated instruments with modest coupon rates, targeting a post-deal debt burden of 85% of GDP.

• This estimation of recovery however rests on fragile assumptions. Oil production growth remains uncertain particularly given infrastructure required for expansion. This raises the risk that we may see restructuring skewed more towards debt relief than markets are currently anticipating.

• The complexity is exacerbated by legal and institutional constraints. Many Venezuelan bonds lack collective action clauses. Additionally, arbitration claims and court judgments compete directly with bondholders for recoveries while US sanctions still require explicit licensing for settlement.

• Overall, Maduro’s removal makes restructuring possible but not imminent due to the numerous structural hurdles Venezuela has formed over the years.

China’s Role

• Meanwhile, China remains a key constraint to Venezuela’s debt restructuring. With much of Venezuela’s bilateral debt owed to China being structured around oil, Beijing effectively had exposure to the country’s most valuable asset.

• However, Maduro’s capture disrupted this structure in 2026. Washington now controls Venezuela’s oil exports, with proceeds being directed into an external account. This removes the oil barrels previously servicing Chinese debt.

• Chinese officials have moved quickly to protect their position seeking talks with Venezuelan transitional authorities and US officials to seek assurance over their loans. There is little evidence suggesting China is willing to allow haircuts on their debt payments. Instead, its focus is on maintaining strategic influence rather than signing up to a structured deal.

• This is significant because if China continues to seek preferential treatment, it could worsen haircuts for other bondholders, causing a conflict of interests.

• Hence, the US-China rivalry is central to shaping the recovery values and pace of this major debt restructuring. The market may be underestimating the risk this constraint could cause.

Our View

• To conclude, Venezuelan bonds are a classic case of a high yield, high risk opportunity. The removal of Maduro and the sharp rally that followed explain why hedge funds and distressed debt investors have been eager to buy Venezuelan bonds. At current prices, investors are betting that a debt restructuring will happen and that recovery values will be much higher than where bonds traded in the past.

• However, while the upside looks attractive on paper, the risks remain substantial. Much of the optimism now seems to be reflected in prices. Current bond prices are assuming progress on several difficult issues at once: political stability, sanctions relief, coordination between creditors, and a recovery in oil production. None of these are guaranteed, and they are all interdependent on each other for a successful restructuring to occur.

• Restructuring remains a likely outcome, but the path toward it will be slow and unpredictable. Clearer political leadership and concrete progress on restructuring talks seems wiser before increasing exposure on Venezuelan bonds.